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VAT's up, sales fall 75%
July, 14th 2009

The sale of mobile handsets in Maharashtra have fallen by three-fourth in the first 10 days after the increase in value-added tax (VAT). While sales revenue was Rs 70 crore between June 1 and June 10, the figure for the corresponding period in July is Rs 16.8 crore, according to industry body Indian Cellular Association (ICA).

The state government has hiked VAT on mobile phones from 4% to 12.5% in a move that is likely to reduce its revenue from the levy by around Rs 475 crore in the next three years. According to a study by ICA, the sales decline in rural areas is as steep as 85%. Every month, a million handsets are sold in Maharashtra, the countrys largest mobile market by revenue as well as units.

"We expect sales to erode by 80% if VAT is retained at 12.5%," ICA president Pankaj Mohindroo said at a press conference in Mumbai on Monday.

Maharashtra is also India's biggest mobile market with 47 million users and monthly sales of around Rs 300 crore. Since it is the only market to impose octroi on handsets, that revenue will also go down with dwindling sales through legal channels.

"Customers will lose warranties and will reach out to the grey market for cheaper products from the Middle East. This will hurt organised retail trade and make penetration in price-sensitive rural areas impossible due to higher prices," Mr Mohindroo said.
Representatives from ICA and handset makers like Nokia and Samsung will meet senior state government officials, seeking a rollback of the VAT hike. They have already submitted a petition to chief minister Ashok Chavan.

The state expects to get Rs 370 crore as VAT from the sale of mobile handsets in the current fiscal. "However, that will not be possible in view of the steep decline in sales. Also, grey channel sales are a concern for national security and will have more impact than revenue loss," he added.

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